1. Introduction

The R&D tax credit is a tried and tested tax policy success, both here and abroad. Its continuance is fundamental to the growth of indigenous and multinational investment in innovation in Ireland. Statistics on the cost of the R&D tax credit as a tax expense to the Exchequer are from time to time the subject of media attention. However, it is important to note that the R&D tax credit is responsible for considerable tax revenue in terms of the PAYE revenue raised from jobs created in the innovation sector.

The R&D tax credit needs to be tailored to facilitate growth in the SME sector. This can be achieved by reforming the manner in which the R&D credit is allocated to employees, accelerating qualifying corporation tax refunds on foot of an R&D tax credit claim and by reducing the level of paperwork required of SMEs to qualify and to retain access to the R&D tax credit.

We hope that this consultation will result in a renewed commitment to one of Ireland’s most pro-enterprise tax reliefs. The review will hopefully drive improvements in tax legislation and tax administration relating to the R&D tax credit to ensure that the tax credit is best in class internationally and crucially, supports Irish indigenous innovation.

In May, the CCAB-I conducted a survey of members working in practice and industry with professional experience of the R&D tax credit. The questions in the survey are based on the questions in the consultation document issued by the Department of Finance. A summary analysis of the hundred and twenty four responses is provided in this submission. The main body of this submission highlights practical issues with the current R&D tax credit regime which is consistent with previous submissions we have made to the Department of Finance and representations with Revenue as part of the TALC process.

2. Remove high income barrier for claiming key employee R&D tax credit

Companies are not innovators; the individuals employed by them are. Therefore, the option of passing on the benefit of a R&D tax credit under section 472D TCA 1997 to certain employees is valuable for the purposes of motivating and incentivising R&D skilled staff. However, the incentive as it is currently structured does not always have the desired impact because the 23 percent effective rate of tax condition1 on claiming the relief is subject to a high salary condition which means that the average R&D worker cannot access the relief. An amendment to the 23 percent effective rate condition will assist small indigenous companies in particular in attracting and retaining talented employees for the long term growth of the business.

For example, in order to fulfil the requirement that the relief cannot reduce the employee’s effective rate of tax below 23 percent, a single individual should be earning in excess of €60,000 to ensure that claiming the relief does not reduce the effective rate of tax to less than 23 percent. In practice, this means the individual should have a salary in the order of €67,000 to even consider qualifying for relief on a R&D tax credit of €1,000.

		€	€
Gross salary		60,000	67,000
Tax Rate Bands:
35,300	20%	7,060	7,060
Balance	40%	9,880	12,680
		16,940	19,740
PAYE credit		(1,650)	(1,650)
Single persons credit		(1,650)	(1,650)
R&D tax credit		(1,000)
		13,640	15,440
Effective tax rate		22.73%	23.04%

The latest salary scales for the R&D sector indicate that a process chemist with three years or more experience in the Dublin region earns €40,000 to €60,000 and outside of Dublin, the salary is €45,000 to €60,000. An employee in the R&D sector needs to hold a senior position such as R&D director to reach a pay scale of €90,000 to €120,0002. An effective minimum rate of 10 per cent would allow employees on salaries of €40,000 onwards to benefit from the relief which is consistent with the salary of employees who are at a level more conducive to the goal of using this tax credit to encourage greater productivity and long term commitment from staff who can grow with the company.

Lifting what is essentially a high salary condition to the relief will also assist small indigenous businesses who may not be in a position to pay the top salary levels indicated for the R&D sector.

There is also a time delay of a number of years between when a company generates the tax credit available for a key employee and the tax year in which the employee can claim the tax relief. For example, a company with an accounting period that ends on 30 June 2019 surrenders an R&D tax credit of €20,000 from that period to a key employee. Assuming that the key employee satisfies the conditions to qualifying for relief, the earliest year in which the employee will receive the tax relief is 2021 on filing a 2020 income tax return. The employee is also treated as a chargeable person for tax purposes on making the claim and is obliged to file a tax return. With the advent of real-time PAYE reporting under the PAYE Modernisation project introduced in January 2019, it would be more attractive for employees to have the benefit of the R&D tax credit factored into the calculation of tax on their salary from the employer surrendering the tax credit in the year following the accounting year-end which generated the tax credit. This would also remove the more onerous tax compliance requirement for the employee to be a chargeable person for the purposes of claiming the tax credit.

3. Accelerate R&D tax credit refunds to SMEs

The CCAB-I recommends accelerating R&D tax credit refunds from 33 months to 12 months for start-up SME companies. This change would represent a cashflow cost rather than an additional cost to the Exchequer. It would also improve the cashflow position of many SMEs who are cash strapped and allow them to accelerate their R&D cycle. The R&D tax credit infrastructure is already in place and is proven in its effectiveness as a meaningful tax relief from the taxpayer’s perspective and it is also a well regulated relief from Revenue’s perspective. Therefore support for the SME sector via the R&D tax credit is an appropriate fit for policy measures aimed at encouraging productivity and growth of Irish SMEs.

4. Reduce documentation obligations and detailed enquiries in support of SMEs

Improvements to Revenue guidelines on document obligations3 have been achieved in the last year or so through the collaboration of Revenue and the representative bodies of TALC. However, given the acknowledged low proportion of the relief claimed by the SME sector4, further work could be carried out to reduce the level of documentation placed on SMEs to qualify and support R&D tax credit claims.

As evidenced in the responses to our survey, professional accountants see first-hand the difficulties experienced by SMEs and start-up companies in trying to access the tax credit as these businesses do not have the resources in terms of support staff or funds to engage professional advice needed to prepare the documentation requirements as stipulated by Revenue. A lighter touch documentation requirement for the SME sector would go a long way in addressing this barrier and should be achievable in a manner which also protects the integrity of compliance checks necessary to police the tax credit.

Telephone access to Revenue staff expert in the operation of the compliance of the R&D tax credit tailored to the SME sector would be hugely helpful in ensuring that a small company has confidence that all requirements are in place to access the tax credit.

An “Advance Assurance5” option for SMEs similar to that available in the UK would also bring much needed confidence to start-up SMEs. Advance Assurance gives companies a guarantee that R&D claims will be accepted for the first three accounting periods without enquiries by HMRC if the claim is in line with pre-agreed criteria with HMRC. This gives a company certainty that its project will qualifying for the R&D tax credit and the company will also be able to devote its resources to conducting R&D rather than dealing with tax enquiries on the science test, accounting test and documentation obligations.

5. Streamline expert opinions

Our members have also noted instances of inconsistency between the views and opinions of experts engaged by Revenue to consider the science test. An “expert panel review” option should be available in cases of dispute whereby a group of two or three experienced experts would review the findings of the expert in a particular audit/intervention and the information provided by the taxpayer in defence of its claim. As with all fields of science, an interpretation of a particular set of facts may give rise to diverse but valid opinions and the option to have the view of one expert assessed by a group of peers is the fairest means of arriving at an acceptable conclusion given the importance of the tax credit to the taxpayer.

6. Relax restrictions on subcontractor expenditure

Subcontracting is viewed as a very important component of workflow patterns for companies conducting R&D activities for both large and small operations.

In terms of larger companies, subcontracting is often self-limited by the company so that the tax credit restrictions are maintained and this can result in the inefficient use of in-house resources and may lead to a poorer quality outcome to the R&D effort than would otherwise be the case if the particular task had been outsourced/subcontracted.

Smaller companies often have no choice but to outsource R&D activities due to resourcing constraints. Restrictions under the tax rules for claiming the R&D tax credit often result in an overall reduction of a SMEs optimal level of R&D activity as they struggle to find a balance between outsourcing needs and ensuring that expenditure on subcontractors can fit the tax credit restrictions.

The restrictions should be increased for example, to 25 percent or 30 percent of spend and/or expenditure of up to €400,000 or €500,000 to fit the commercial needs of companies conducting R&D. This would help small specialist contractor operations and third level institutions to operate commercially viable businesses and it would allow R&D companies more flexibility in their use of in-house expertise.

Ireland is committed to driving STEM education6 as part of a national education strategy headed by the Department Education and Skills. Reducing the restrictions on outsourcing to Irish and EU third level institutions will increase R&D activity in colleges and universities which in turn could give STEM students more practical experience and opportunities to apply their skills while also providing a much needed funding source for third-level institutions. While we acknowledge that it is difficult to exclusively funnel the benefits of relaxed contracting restrictions in the direction of Irish third level institutes as European Union law prohibits such discrimination, a rethinking of the restriction is nonetheless worthwhile and appropriate give the Irish STEM policy agenda.

7. Survey conducted by CCAB-I

One hundred and twenty four professional, regulated accountants responded to the survey. A summary of the responses are provided to the questions posed in the survey. The quality and insight of the responses to this topic are exceptional and we strongly recommend that this data is carefully considered and acted upon.

1. Do you work in:

• practice providing compliance/advice related to the R&D credit 35.5%
• a company/group with R&D credit related operations 64.5%

2. What do you think are the key considerations taken into account by a business in the decision to base R&D activity in Ireland?

The majority of respondents felt that Ireland’s skilled, educated workforce is the main factor in the decision matrix of a business considering the location of R&D activities. The respondents acknowledged that the R&D tax credit is also very important along with other Government supports such as Enterprise Ireland grants.

3. In the absence of the R&D tax credit, what proportion of a company’s R&D operations would take place in Ireland?

Respondents felt it was difficult to quantify how much R&D would be carried out in Ireland if the tax credit was not available but the majority view is that R&D activity would reduce in Ireland in the absence of a tax credit. Some noted that a company’s R&D investment decision is not exclusively based on tax. It was noted that multi-nationals in particular have R&D activities in locations all over the world which offer tax incentives so activity in Ireland could be transferred to other established R&D hubs if Ireland did not offer a R&D tax credit. Respondents also noted that SMEs would be more adversely impacted than multi-nationals in the absence of the R&D tax credit.

4. In your experience, does a company’s R&D activity in Ireland result in the recruitment of additional staff, interns or apprentices in Ireland?

The overwhelming majority of respondents said that additional staff recruitment was correlated to a company’s R&D activity and the availability of the tax credit. The responses indicate that staff recruitment at both the highly skilled level of PhD and third-level graduates, and recruitment of support and administration staff is funded by the R&D tax credit. The importance of the tax credit when it comes to generating support and administration jobs in R&D companies does not appear to be fully considered in past economic reviews of the tax credit and the spillover impact of the credit is seen as significant to the funding of support level jobs. The experience of jobs creation differs depending on the size of the business but one respondent noted that the company employed 90 staff in the time before it qualified for R&D tax credit and today the company employs 350 staff with staff growth attributed by the respondent to resources assisted by the R&D tax credit.

5. The R&D credit allows for limited outsourcing of R&D. Are the limitations for outsourcing appropriate? What is the impact of these outsourcing limitations on third level institutions and/or smaller firms?

Views varied in responses to this question. Many believed that the limitation on outsourcing is too restrictive for the SME sector and has a negative impact on the third level institutions. Respondents noted that the outsourcing limitations should be relaxed for Irish based contractors and for Irish third level institutions in particular. SMEs do not have resources to undertake all aspects of R&D themselves and outsourcing is a necessary feature of the business life-cycle of early stage enterprises in particular and this fact could be better supported through a more generous expenditure limits for the purposes of an R&D tax credit claim. A smaller number of respondents felt that the limitations were appropriate for multinational enterprises while others do not outsource for commercial reasons linked to the nature of their business.

6. The uptake of the R&D credit among SMEs is relatively low. Are there ways of improving the current credit system to make it more attractive to small and medium sized enterprises?

This question generated detailed responses from the 124 respondents to the survey indicating strong views on the matter. Reasons for the low uptake of the R&D tax credits were attributed to the following factors:

• According to the majority of those surveyed, onerous levels of documentation to support the R&D tax credit claim to the standard required by Revenue is the main reason why SMEs do not claim the R&D tax credit.
• SMEs have no security when making a claim due to the risks of a clawback of tax relief on foot of Revenue scrutiny.
• Challenges by experts acting on behalf of Revenue are expensive and time consuming to defend from the perspective of the SME.

Suggestions put forward by the respondents to the CCAB-I survey to encourage more uptake of the R&D tax credit by the SME sector can be summarised as follows:

• Simplify the administration and tracking process currently necessary to support R&D tax credit claims.
• Simplify the qualification criteria under tax law for SMEs.
• The availability of the R&D tax credit to SMEs should be actively marketed using relatable case studies and language which non-financial or non-taxation experts can understand.
• A pre-clearance system by Revenue is suggested as a means of introducing certainty for SMEs on the validity of an R&D tax claim.
• Scientific test determinations by Revenue experts can be arbitrary and could be standardised relevant to specific sectors.

1 A key employee cannot avail of a section 472D credit if the effective rate of income tax on his or her total income for the tax year of claim is 23% or less on claiming the credit.

2 The Brightwater Group Salary Survey 2019

3 For example, suggested fi le layout as set out in Tax and Duty Manual, Part Part 29-02-03

4 Revenue’s Research & Development (“R&D”) Tax Credit Statistics, May 2019 p.6 indicates that 35% of €448m the R&D tax credit claimed for 2017 was by companies with staff of less than 250 employees (companies with less than 50 employees claimed only 20% of total R&D tax credit in 2017).

5 HMRC Research and development tax relief Making R&D easier for small companies

6 Department of Education and Skills, STEM Education Policy Statement 2017–2026